What to Make Out of the ECB July 2020 Meeting

The main event of the week for financial markets was yesterday’s ECB meeting. Although no one expected a change in the monetary policy conditions, there is always the potential for sharp market moves when one of the most active central banks in the world expresses its views. 

The interest rate decision and the press conference that followed did not bring anything new. As a consequence, the Euro pairs were unaffected, with the EURUSD, the most representative of them all, moving in a range smaller than thirty pips during the event.

However, some things are worth mentioning about this July 2020 ECB meeting.

Dovish Comments from Lagarde

The Euro went extremely bullish into the ECB meeting. Unlike other times, when it traded in tight ranges in the days before the meeting, this week it started on an optimistic note since early Monday.

EURGBP, EURAUD, EURJPY, and EURUSD – they all moved higher early in the week and then consolidated the levels during the ECB decision and the press conference.

Hence, we can say that the Euro did move on the ECB week, only it did so way earlier. As it turned out, the ECB message was already priced in – a dovish one from Lagarde. The dovish comments related to the Pandemic Emergency Purchase Programme (PEPP) as the ECB reminded the market of its dual objective and its flexibility.

The dovishness in the tone is curious because the Euro rose in May on exactly the opposite. When the ECB announced its new program, a measure destined to relax financial conditions, the Euro surged, as investors welcomed the decision. Now, the reaction should have been the opposite, but the market did not move. How come?

The answer to both the Euro bid tone and the lack of reaction to the ECB message comes from the EU Council taking place over the weekend. In fact, it starts today and the discussions extend over the weekend, with a decision over the recovery fund to be announced when markets are closed.

While the market expects a positive outcome, explained by the rise in the Euro, some of the Northern states, the Netherlands in particular, oppose the current form of the plan. More precisely, the states do not agree on the form of the funds – grants vs. loans. There is a big difference between the two, and this weekend we’ll find out the outcome.

Until then, the Euro pairs are unlikely to change much.

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